Why do clubs spin off their football department - a primer

Why are football clubs „clubs“?

In Germany, most popular sport is traditionally organised in the legal form of clubs („eingetragene Vereine“). The reasons for this go back to the 19th century and „Turnvater Jahn“ and are beyond the scope of this post.

This tradition has been true for the sport of football as well.

So originally, almost every German football club once started out as an „eingetragener Verein“ (football club / „Fußballverein“).

Why spinning off a football subsidiary? What’s the problem?

According to German club law, German clubs are meant to provide an idealistic service for the greater good of the society as a whole by bringing people together, strengthening a sense of community, helping people in need etc.

Major services rendered by sports clubs in this sense are e.g. the provision of training facilities, organisation of common practice sessions, and staging competitions for their members.

German club law also specifies that in Germany, a club („eingetragener Verein“) may not primarily pursue economic interests - this includes football clubs.

This means that a club may not primarily engage in the selling of goods and services on a market, serve the economic interests of their members, or compensate their employees unduly highly.

This begs the obvious question as to whether professional German football clubs really still adhere to the idealistic principles of a club according to German law - or if they are not in truth rather fully fledged business enterprises primarily pursuing economic interests.

Because such considerations are not completely unfounded, the professional football clubs run an enormous risk, because all it takes is a determined claimant and a disgruntled judge to cancel the „eingetragener Verein“ status and eliminate the club from the club register because of non-compliance with German club law.

The consequences would be massive. A club would literally cease to exist. It would have to shut down its operations immediately (no competitive games any more) and would be faced with lawsuits and severe economic consequences.

Because legally a club is a joint partnership of its members, every member is personally liable for their club’s debts and outstanding claims with their entire private wealth. In other words: if a Bundesliga club should be legally dissolved, each and every one of its members will most certainly end up economically ruined.

These same risks for a club’s members also apply if a club is faced with insolvency or any other terminal business problems.

What to do to counter these problems?

The clubs are aware of these risks and that’s why they spin off their football departments into independent subsidiary corporations.

These corporations have the double benefit that they are legally allowed to pursue economic goals as their primary purpose and that they eliminate the risk of personal liability for their members, because the liability of a corporation is limited to the nominal capital invested into it. In the case of an insolvency or any other business failure, a claimant has no access to the private wealth of any of its stockholders.

Thus, the step of spinning off the football department eliminates the mainly legal risks of a club being legally eliminated overnight and their members constantly just one ruling in a court of law away from financial ruin. It also allows a club to actively and overtly pursue economic goals without running afoul of the law.

The step also has several economic benefits. For one, it also allows simple change of membership (or voting and decision rights) just by passing on (selling) one’s stock or shares thereof. Thus, it makes it comparatively easy to acquire new equity if needed.

Secondly, the acquisition of debt capital will be simpler and more straightforward because banks and other lenders usually have greater trust in established corporations than (risky) clubs.

Thirdly, as employees can be freely compensated, the subsidiary can establish a professional organisational structure and hire qualified personnel.

Which legal entity to choose?

German law provides for several feasible options to choose for a football subsidiary. These are in the main: GmbH, AG, GmbH & Co KGaA

AG is least common, followed by GmbH, followed by GmbH & Co KGaA as the most popular choice.

According to Wikipedia, these are the legal entities of Germany’s first and second Bundesliga football clubs/subsidiaries:

Still „eingetragener Verein“: FC Erzgebirge Aue, 1. FC Union Berlin, SV Darmstadt 98, Fortuna Düsseldorf, Dynamo Dresden, SC Freiburg, 1. FC Heidenheim, Karlsruher SC, Holstein Kiel, 1. FSV Mainz 05, 1. FC Nürnberg, SV Sandhausen, FC Schalke 04, FC St. Pauli

GmbH & Co. KGaA: FC Augsburg, Arminia Bielefeld, VfL Bochum, Hertha BSC, Werder Bremen, Borussia Dortmund, SpVgg Greuther Fürth, Hannover 96, 1. FC Köln, VfL Osnabrück, SC Paderborn 07, SSV Jahn Regensburg

GmbH: TSG 1899 Hoffenheim, FC Ingolstadt 04, RB Leipzig, Bayer 04 Leverkusen, Borussia Mönchengladbach, VfL Wolfsburg

AG: Eintracht Frankfurt, Hamburger SV, FC Bayern München, VfB Stuttgart

Why is the GmbH & Co. KGaA so popular?

The GmbH & Co KGaA has several crucial advantages over the GmbH and AG which make it such a popular choice.

First, a KGaA allows stocks to be transferred between parties („Kommanditaktionäre“) almost as easily as in the case of an „AG“ (shareholder).

Second, every „Kommanditaktionär“ is liable for the business risk of the corporation only with their invested amount, thus limiting the risk of a total loss to the amount invested.

Third - and most importantly - the statutes of KGaA can stipulate that the „Komplementär“, who is the ‚man in charge‘ in a KGaA, can retain full authority about every major business decision even if the majority of the corporation’s stakes are held by outside investors. In other words, even if a KGaA has sold, say, 80 or 90% of its stock on the market, the „Komplementär“ remains completely in charge (if this is so specified in the statutes).

It is also crucial to note that no single „Kommanditaktionär“ or even a large alliance thereof can oust the „Komplementär“ from the company. This usually needs the assent of the „Komplementär“ as well. So what’s known in business as a „hostile takeover“ (e.g. a Russian oligarch or an Arab sheikh secretly buying up the majority of shares and assuming control) isn’t possible.

But why choose a GmbH & Co KGaA and not just a KGaA? Why the added complexity?

The problem of a KGaA is that the „Komplementär“ is personally liable with his entire property for all legal and business risks of the football subsidiary.

If the „Komplementär“ is the „eingetragener Verein“ - as required by the 50+1 rule, because the „e.V.“ needs to retain 50% plus 1 share of the decision rights in the football subsidiary - nothing much is gained compared to the original form of an „eingetragener Verein“ (see above). The club and its members would still be personally liable for the business of their football subsidiary.

To counter this risk, the role of the „Komplementär“ is performed by a ‚Management GmbH‘, which is itself a limited liability company. This GmbH, in turn, is fully owned and controlled by the „e.V.“ Thus, two things are achieved:

First, the „e.V.“ still has the first and last word in every crucial business decision in the football subsidiary, while…

…secondly, the risk of personal liability of any of the club’s members is also removed, because the liability of the „Komplementär“ is limited to the nominal capital of the GmbH (in Germany that’s a minimum of 25,000 Euros at the moment). Thus, the GmbH acts like a liability shield in between the football subsidiary and the members of the „e.V.“.

The final configuration therefore looks something like this:

„e.V.“ — 100% ownership —> Management GmbH — at least 50% + 1 decision rights —> football subsidiary GmbH & Co KGaA

Example for a GmbH & Co KGaA football subsidiary: Borussia Dortmund

  • football department spun off since 1999 into „Borussia Dortmund GmbH & Co. KGaA“
  • Voting rights: 100 % held by „BVB 09 e. V.“ Dortmund (via „Borussia Dortmund Geschäftsführungs-GmbH“ as „Komplementär“ of GmbH & Co KGaA)
  • Stockholders:
    ca. 49 % free float shares
    ca. 20 % Bernd Geske
    14.78 % Evonik Industries AG
    5.53 % BVB 09 e. V. Dortmund
    5.43 % Signal Iduna
    5.00 % Puma SE

Thus, Dortmund is a prime example of a club that has sold the vast majority of its stock to outside investors (all but 5.53%) while continuing to have 100% of the decision rights in their football subsidiary.

Lastly: why are the entities of GmbH or AG not so popular?

GmbHs and AGs have several disadvantages compared to the GmbH & Co KGaA, which makes both of them a less popular choice for a football subsidiary’s legal incorporation.

First, both these legal incorporations peg their voting rights directly to the amount of shares held. I.e. owning a 5% share in a GmbH or AG means having 5% of the voting rights (disregarding special arrangements such as „stimmrechtslose Vorzugsaktien“). So if a club wants to comply with 50 + 1 and retain a majority of the decision rights, they cannot sell any more than 50% - 1 share of their football subsidiary to outside investors. This is not necessarily true for a GmbH & Co KGaA (see above).

Secondly, transferring stock between stockholders in a GmbH is a cumbersome process because usually all other stockholders have to agree on this and a formal contract has to be drafted. Such problems don’t exist for an AG or a KGaA („Kommanditgesellschaft auf Aktien“), where shares can easily be transferred between parties by the process of selling and buying.

Having heard the brief discussion on why to spin off your football department if you are a club, I thought I’d provide a very basic introduction to the topic. :grinning: I hope it is more clarifying than it is confusing.

Maybe you need a blog? :wink: